Strategy formulation : Strategy formulation : situation analysis and situation analysis and

business policybusiness policy

Situational Analysis :SWOT Situational Analysis :SWOT AnalysisAnalysis

Internal EnvironmentInternal Environment• SStrengthstrengths• WWeaknesseseaknesses

External EnvironmentExternal Environment• OOpportunitiespportunities• TThreatshreats

Criticisms of SWOT analysisCriticisms of SWOT analysis

• It generates lengthy listsIt generates lengthy lists• It uses no weight to reflect prioritiesIt uses no weight to reflect priorities• It uses ambiguous words and phrasesIt uses ambiguous words and phrases• The same factor can be placed in 2 categoriesThe same factor can be placed in 2 categories• There is no obligations to verify opinions with There is no obligations to verify opinions with

data or analysisdata or analysis• It requires only a single effect of analysisIt requires only a single effect of analysis• There is no logical link to strategy There is no logical link to strategy

implementationimplementation

51 2 3 4

Strategic Factor Analysis Summary Strategic Factor Analysis Summary (SFAS)(SFAS)

Key Strategic Factors(Select the most important opportunities/threats from EFAS, Table 3.4 and the most important strengths and weaknesses from IFAS, Table 4.2)

Total Score

Weight RatingWeighted Score Comments

Notes: 1. List each of your key strategic features developed in your IFAS and EFAS tables in Column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4. 5. For duration in Column 5, check appropriate column (short term—less than 1 year; intermediate—1 to 3 years; long term—over 3 years.) 6. Use Column 6 (comments) for rationale used for each factor.Source: T. L. Wheelen and J. D. Hunger, “Strategic Factors Analysis Summary (SFAS).” Copyright © 1997 by Wheelen and Hunger Associates. Reprinted by permission.

SH

OR

T

INTE

RM

ED

IATE

LON

G

Duration 6

Key Strategic Factors(Select the most important opportunities/threats from EFAS, Table 3.4 and the most important strengths and weaknesses from IFAS, Table 4.2)

S1 Quality Maytag culture (S)

S3 Hoover’s international orientation (S)

W3 Financial position (W)

W4 Global positioning (W)

O1 Economic integration of

European Community (O)

O2 Demographics favor quality (O)

O5 Trend to super stores (O + T)

T3 Whirlpool and Electrolux (T)

T5 Japanese appliance companies (T)

Total Score

Weight RatingWeighted Score Comments

1.00

Notes: 1. List each of your key strategic features developed in your IFAS and EFAS tables in Column 1. 2. Weight each factor from 1.0 (Most Important) to 0.0 (Not Important) in Column 2 based on that factor’s probable impact on the company’s strategic position. The total weights must sum to 1.00. 3. Rate each factor from 5 (Outstanding) to 1 (Poor) in Column 3 based on the company’s response to that factor. 4. Multiply each factor’s weight times its rating to obtain each factor’s weighted score in Column 4. 5. For duration in Column 5, check appropriate column (short term—less than 1 year; intermediate—1 to 3 years; long term—over 3 years.) 6. Use Column 6 (comments) for rationale used for each factor.Source: T. L. Wheelen and J. D. Hunger, “Strategic Factors Analysis Summary (SFAS).” Copyright © 1997 by Wheelen and Hunger Associates. Reprinted by permission.

SH

OR

T

INTE

RM

ED

IATE

LON

G

Duration

3.05

.10

.10

.10

.15

.10

.10

.10

.15

.10

Quality key to success

Name recognition

High debt

Only in N.A., U.K., and Australia

Acquisition of Hoover

Maytag quality

Weak in this channel

Dominate industry

Asian presence

5

3

2

2

4

5

2

3

2

.50

.30

.20

.30

.40

.50

.20

.45

.20

Strategic Factor Analysis Summary (SFAS): Maytag Strategic Factor Analysis Summary (SFAS): Maytag as Exampleas Example

X

X

X

X

X

X

X

X

X

Internal Factor Analysis Summary (IFAS):Internal Factor Analysis Summary (IFAS):Maytag as ExampleMaytag as Example

Internal Factors Weight RatingWeighted Score Comments

1 2 3 4 5

1.00

Strengths• Quality Maytag culture• Experienced top management• Vertical integration• Employee relations• Hoover’s international orientationWeaknesses• Process-oriented R&D• Distribution channels

• Financial position• Global positioning

• Manufacturing facilitiesTotal Weighted Score

Quality key to successKnow appliancesDedicated factoriesGood, but deterioratingHoover name in cleaners

Slow on new productsSuperstores replacing small dealersHigh debt loadHoover weak outside the United Kingdom and AustraliaInvesting now

3.05

.15

.05

.10

.05

.15

.05

.05

.15

.20

.05

54433

22

22

4

.75

.20

.40

.15

.45

.10

.10

.30

.40

.20

External Factor Analysis Summary (EFAS): Maytag as External Factor Analysis Summary (EFAS): Maytag as ExampleExample

ExternalStrategic Factors Weight Rating

Weighted Score Comments

1.00

Opportunities• Economic integration of

European Community• Demographics favor quality appliances• Economic development of Asia• Opening of Eastern Europe• Trend to “Super Stores”Threats• Increasing government regulations• Strong U.S. competition• Whirlpool and Electrolux strong globally• New product advances• Japanese appliance companies

Total Scores

.20

.10

.05

.05

.10

.10

.10

.15

.05

.10

4

5

122

443

12

.80

.50

.05

.10

.20

.40

.40

.45

.05

.20

Acquisition of HooverMaytag quality

Low Maytag presenceWill take timeMaytag weak in this channelWell positionedWell positionedHoover weak globally

QuestionableOnly Asian presence is Australia

3.15

1 2 3 4 5

SO Strategies Generate strategies here that use strengths to take advantage of opportunities

ST Strategies Generate strategies here that use strengths to avoid threats

WO Strategies Generate strategies here that take advantage of opportunities by overcoming weaknesses

WT Strategies Generate strategies here that minimize weaknesses and avoid threats

INTERNAL FACTORS

(IFAS)EXTERNAL FACTORS (EFAS)

Strengths (S) List 5 – 10 internal strengths here

Weaknesses (W) List 5 – 10 internal weaknesses here

Opportunities (O) List 5 – 10 external opportunities here

Threats (T) List 5 – 10 external threats here

TOWS MatrixTOWS Matrix

Source: Adapted from Long-Range Planning, April 1982, H. Weihrich, “The TOWS Matrix—A Tool for Situational Analysis” p. 60. Copyright 1982, with kind permission from H. Weihrich and Elsevier Science Ltd. The Boulevard, Langford Lane, Kidlington OX5 1GB, UK.

Expand Hoover’s presence in continental Europe by improving quality & reducing costsEmphasize superstore channel for all non-Maytag brands

SO Strategies • Use worldwide Hoover dis-tribution channels for Hoover and Maytag• Find joint venture partners inEastern Europe & Asia

ST Strategies

• Acquire Raytheon’s appliance business• Merge with major Japanese home appliance company• Sell off non-Maytag brands; defend Maytag’s US niche.

WO Strategies • Expand Hoover’s presence in

continental Europe by improving quality & reducing costs• Emphasize superstore channel for non-Maytag brands

WT Strategies

• Sell off Dixie-Narco division toreduce debt• Emphasize cost reduction to reduce break-even point• Sell out to Raytheon or aJapanese firm.

INTERNAL FACTORS

(IFAS)EXTERNAL FACTORS (EFAS)

Strengths (S)

S1 Quality Maytag CultureS2 Experience top managementS3 Vertical integrationS4 Employee relationsS5 Hoover’s international orientation

Weaknesses (W) W1 Process-orientedW2 Distribution channelsW3 Financial positionW4 Global positioningW5 Manufacturing facilities

Opportunities (O)

O1 Economic integration of European communityO2 Demographics favor qualityO3 Economic development, Asia O4 Opening Eastern EuropeO5 Trend toward super stores

Threats (T)

T1 Increasing government regulationT2 Strong US competitionT3 Whirlpool & Electroluxpositioned for global economy T4 New product advancesT5 Japanese companies

TOWS Matrix: Maytag as TOWS Matrix: Maytag as ExampleExample

Source: Adapted from Long-Range Planning, April 1982, H. Weihrich, “The TOWS Matrix—A Tool for Situational Analysis” p. 60. Copyright 1982, with kind permission from H. Weihrich and Elsevier Science Ltd. The Boulevard, Langford Lane, Kidlington OX5 1GB, UK.

Business StrategyBusiness Strategy• Competitive: battling against all competitors for Competitive: battling against all competitors for

advantagesadvantages• Cooperative: working with one or more competitors to Cooperative: working with one or more competitors to

gain advantage against other competitorsgain advantage against other competitors• In general, business strategy focuses on improving the In general, business strategy focuses on improving the

competitive position of a company’s or business unit’s competitive position of a company’s or business unit’s products or services within the specific industry or market products or services within the specific industry or market segment that the company or business unit servessegment that the company or business unit serves

Porter’s Competitive Porter’s Competitive StrategiesStrategies

• Lower cost strategy : the ability of a company to Lower cost strategy : the ability of a company to design, produce and market a comparable design, produce and market a comparable product more efficiently than its competitorsproduct more efficiently than its competitors

• Differentiation strategy : the ability to provide Differentiation strategy : the ability to provide unique and superior value to the buyer in terms unique and superior value to the buyer in terms of product quality, special features, or after-sale of product quality, special features, or after-sale serviceservice

• A firm’s competitive advantage in an industry is A firm’s competitive advantage in an industry is determined by its competitive scope (the breadth determined by its competitive scope (the breadth of the company’s or business unit’s target of the company’s or business unit’s target market)market)

• Before using a competitive strategy (lower cost Before using a competitive strategy (lower cost or differentiation), the firm must understand its or differentiation), the firm must understand its unique resourcesunique resources

• A firm can choose a broad target (mass market) A firm can choose a broad target (mass market) or a narrow target (market niche)or a narrow target (market niche)

Porter’s Generic Competitive Porter’s Generic Competitive StrategiesStrategies

Source: Reprinted with permission of The Free Press, an imprint of Simon & Schuster, from The Competitive Advantage of Nations by Michael E. Porter, p. 39. Copyright © 1990 by Michael E. Porter.

Differentiation

Bro

ad T

a rg e

tN

arro

w T

arge

t

Competitive Advantage

Cost Leadership Differentiation

Cost Focus Focused Differentiation

Com

petit

ive

Scop

e

Lower Cost

1.1. Cost leadership is a low cost competitive strategy Cost leadership is a low cost competitive strategy aiming at the mass market and the firm can aiming at the mass market and the firm can charge a lower price for its products than its charge a lower price for its products than its competitors and still make a satisfactory profitcompetitors and still make a satisfactory profit

2.2. Differentiation is aimed at the mass market and Differentiation is aimed at the mass market and involves the creation of a product or service that involves the creation of a product or service that is perceived throughout its industry as unique, is perceived throughout its industry as unique, allowing the firm to charge a premium for its allowing the firm to charge a premium for its productproduct

3.3. Cost focus is a low-cost competitive strategy Cost focus is a low-cost competitive strategy that focuses on a particular buyer group or that focuses on a particular buyer group or geographic marketgeographic market

4.4. Differentiation focus concentrates on a Differentiation focus concentrates on a particular buyer group, product line segment or particular buyer group, product line segment or geographic areageographic area

Generic Strategy Commonly Required Skills and Resources Common Organizational Requirements

Overall Cost Leadership Sustained capital investment Tight cost control and access to capital Frequent detailed control reports

 Process engineering skills Structured organization and Intense supervision of labor responsibilities

 Products designed for ease Incentives based on meeting strict of manufacture quantitative targets

 Low-cost distribution system

Differentiation Strong marketing abilities Strong coordination among functions  Product engineering in R&D

 Creative flair Subjective measurement and  Strong capability in basic research incentives instead of

quantitative Corporate reputation for quality or measures

technological leadership Amenities to attract highly skilled  Long tradition in the industry or unique labor, scientists, or creative

combination of skills drawn from other people businesses Strong cooperation from channels

Focus  Combination of the above policies directed Combination of the above policies directed

at the particular strategic target at the particular strategic target

Requirements for Generic Competitive Requirements for Generic Competitive StrategiesStrategies

Risks of Generic Competitive Risks of Generic Competitive StrategiesStrategies

Risks of Cost LeadershipCost leadership is not sustained:• Competitors imitate.• Technology changes.• Other bases for cost leadership erode.Proximity in differentiation is lost.Cost focusers achieve even lower cost in segments.

Risks of DifferentiationDifferentiation is not sustained:• Competitors imitate.• Bases for differentiation become less important to buyers.Cost proximity is lost.Differentiation focusers achieve even greater differentiation in segments.

Risks of FocusThe focus strategy is imitated:The target segment becomes structurally unattractive:• Structure erodes.• Demand disappears.Broadly targeted competitors overwhelm the segment:• The segment’s differences from other segments narrow.• The advantages of a broad line increase.New focusers subsegment the industry.

Source: Adapted/reprinted with permission of The Free Press, an imprint of Simon & Schuster, from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter, p. 21. Copyright © 1985 by Michael E. Porter.

Eight Dimensions of QualityEight Dimensions of Quality1. 1. Performance : operating characteristics Performance : operating characteristics2. 2. Features : supplement to basic functions Features : supplement to basic functions3. 3. Reliability: no need for significant repair Reliability: no need for significant repair4. 4. Conformance: meeting standards Conformance: meeting standards5. 5. Durability: number of years of service Durability: number of years of service6. 6. Serviceability: ease of repair Serviceability: ease of repair7. 7. Aesthetics: looks, feels, sounds, tastes, smells Aesthetics: looks, feels, sounds, tastes, smells8. 8. Perceived Quality: overall reputation Perceived Quality: overall reputation

Issues in competitive Issues in competitive strategiesstrategies

• A company must achieve one of the generic A company must achieve one of the generic strategiesstrategies

• However, some companies attempt to achieve However, some companies attempt to achieve both low-cost and differentiation positionsboth low-cost and differentiation positions

• Most entrepreneurial ventures follow focus Most entrepreneurial ventures follow focus strategiesstrategies

Competitive TacticsCompetitive Tactics

TimingTiming• First moverFirst mover• Late moverLate mover

LocationLocation• OffensiveOffensive• DefensiveDefensive

Offensive Competitive Offensive Competitive Location TacticsLocation Tactics

• Frontal assault : head to head with the Frontal assault : head to head with the competitorcompetitor

• Flanking maneuver: attack a part in the market Flanking maneuver: attack a part in the market where the competitor is weakwhere the competitor is weak

• Bypass attack : offer a new type of product that Bypass attack : offer a new type of product that makes the competitor’s product unnecessarymakes the competitor’s product unnecessary

• Encirclement : encircling the competitors Encirclement : encircling the competitors position in terms of products or markets or bothposition in terms of products or markets or both

• Guerilla warfare : hit and runGuerilla warfare : hit and run

Defensive Competitive Defensive Competitive Location TacticsLocation Tactics

• Raise structural barriersRaise structural barriers• Increase expected retaliation Increase expected retaliation • Lower inducement for attackLower inducement for attack

Raise Structural BarriersRaise Structural Barriers

1. Offer a full line of products in profitable market segments 1. Offer a full line of products in profitable market segments to close off any entry pointsto close off any entry points

2. Block channel access by signing exclusive agreements 2. Block channel access by signing exclusive agreements with distributorswith distributors

3.3. Raise buyers switching costs by offering low training to Raise buyers switching costs by offering low training to usersusers

4.4. Keep prices low for new usersKeep prices low for new users5.5. Increase scale economy to reduce unit costsIncrease scale economy to reduce unit costs6.6. Foreclose alternative technologies through patenting or Foreclose alternative technologies through patenting or

licensinglicensing

7. Limit outside access to facilities and personnel7. Limit outside access to facilities and personnel8. Tie up suppliers by exclusive contracts 8. Tie up suppliers by exclusive contracts 9. Avoid suppliers dealing with competitors9. Avoid suppliers dealing with competitors10. Encourage the government to raise barriers10. Encourage the government to raise barriers

Cooperative StrategiesCooperative Strategies

• Collusion ; the cooperation of firms to reduce Collusion ; the cooperation of firms to reduce output and raise prices. Can be explicit through output and raise prices. Can be explicit through direct communication and negotiation (illegal), direct communication and negotiation (illegal), or tacit through an informal signalor tacit through an informal signal

• Strategic alliances: a partnership of 2 or more Strategic alliances: a partnership of 2 or more business units to achieve strategically business units to achieve strategically significant objectives that are mutually beneficialsignificant objectives that are mutually beneficial

Reasons for Strategic Reasons for Strategic AlliancesAlliances

1.1. To obtain technology and/or manufacturing To obtain technology and/or manufacturing capabilitiescapabilities

2.2. To obtain access to specific marketsTo obtain access to specific markets3.3. To reduce financial riskTo reduce financial risk4.4. To reduce political riskTo reduce political risk5.5. To achieve or ensure competitive advantageTo achieve or ensure competitive advantage6.6. To learn new capabilitiesTo learn new capabilities

Types of Strategic AlliancesTypes of Strategic Alliances

• A mutual service consortium is a partnership of similar A mutual service consortium is a partnership of similar companies in similar industries who pool their resources companies in similar industries who pool their resources to gain a benefit that is too expensive to develop aloneto gain a benefit that is too expensive to develop alone

• Joint venture is a cooperative activity, formed by 2 or Joint venture is a cooperative activity, formed by 2 or more separate organizations for strategic purposes, that more separate organizations for strategic purposes, that creates an independent entity and allocates ownership, creates an independent entity and allocates ownership, operational responsibilities and financial risks and operational responsibilities and financial risks and rewards to each member while preserving their separate rewards to each member while preserving their separate identity/autonomyidentity/autonomy

• Licensing Arrangements : agreement in which the Licensing Arrangements : agreement in which the licensing firm grants rights to another firm in another licensing firm grants rights to another firm in another country or market to produce and/or sell a product. The country or market to produce and/or sell a product. The licensee pays compensation to the licensing firm in return licensee pays compensation to the licensing firm in return for technical expertisefor technical expertise

• Value chain partnership : strong alliance in which a Value chain partnership : strong alliance in which a company forms a long term arrangement with a key company forms a long term arrangement with a key supplier or distributor for mutual advantagesupplier or distributor for mutual advantage

Continuum of Strategic Continuum of Strategic AlliancesAlliances

Mutual Service Consortia

Joint Venture Licensing Arrangement

Weak and Distant

Value-Chain Partnership

Strong and Close

Source: Suggested by R. M. Kanter, “Collaborative Advantage: The Art of Alliances,” Harvard Business Review (July-August 1994), pp. 96–108.